Trump doesn’t hold all the cards on international trade

Andrei Sulzenko was a principal negotiator of the original Canada-U.S. Free Trade Agreement.

As U.S. President Donald Trump pushes yet again for trade concessions from myriad partners, including Canada, his so-called leverage is actually a lot less than he likes to think.

The hard reality of looming financial-market censure is, if anything, now heightened compared to the gyrations following the initial tariff shock in April of this year. Current highs in the U.S. stock market seem to reflect investor belief that the recent spate of threats against an ever-extending deadline are a blatant bluff, to be followed by another TACO (“Trump Always Chickens Out”) moment. It will not take much, however, to trigger a dramatic fall should the game of chicken result in a head-on crash with any of the U.S.’s main trading partners.

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Even though the U.S. inflation rate has remained tame, the probability of inflationary pressures building over the coming months is high because of the inevitable lag effects of an already elevated tariff rate on most countries, and on specific input products like steel. There are also signs of weakening economic growth in the U.S., led by a softening labour market. The economy does not, therefore, provide a great backstop for increased trade turmoil.

International dynamics have shifted remarkably in the past few months, with the U.S.’s major trading partners now actively collaborating in ways previously unforeseeable absent U.S. belligerence. As a result, spines are stiffening, and contingency retaliation plans are being honed to maximize pain should negotiations fail.

The conceit that the U.S. has “all the cards” is being eroded daily, as like-minded partners orchestrate a trading environment that leaves the U.S. (and China) increasingly on the outside looking in. This, of course, will do little to soften the short-term pain of a trade war; but there is the prospect of a healthy medium-term revival among a coalition of the willing.

A burgeoning subset of international co-operation, deserving its own special mention, is defence. Here, two things are happening simultaneously: spending, particularly among NATO members, is slated to explode; and the dominance of defence markets by American companies is likely to erode over time, with the pace of that erosion guided by sovereign choices.

Tariffs are now so yesterday. The recent standoff between the U.S. and China demonstrated that a critically important issue in economic relations among countries is access to scarce resources, both natural and technological. China’s leverage in arriving at the current bilateral accommodation with the U.S. was its near-monopoly on rare-earth minerals.

Others can learn from this example, that export controls on key products can be more effective than tariffs on imports. Moreover, as a retaliation tool, export controls do not penalize domestic consumers with the higher prices caused by stiff tariffs (albeit they would negatively affect exporters, absent compensation for short-term losses).

These considerations all help to explain why the vaunted “90 deals in 90 days” have not taken place. The rest of the world can see, without having to say so outright, that the only card game the naked emperor is playing is solitaire. That’s why unilaterally-set deadlines keep being extended.

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The question going forward is, what is the most likely scenario?

Highest on the list of potential outcomes is a series of anemic framework “deals” with major trading partners that allow Mr. Trump to claim victory but do not inflict undue damage to established economic relationships. This would be the lowest-risk result for most countries – in effect, a three-year holding position until sanity returns to American policy.

A more satisfying outcome for most countries would be a stand-down by the U.S. in the face of concerted and co-ordinated opposition, precipitated by calling the deadline bluff, with the promise of strong retaliation involving the following measures: selective punitive tariffs on U.S. products; export controls on products the U.S. cannot source domestically (potash anyone?); clear moves to source defence and related security procurement from non-U.S. suppliers; acceleration of trade liberalization initiatives among non-U.S. participants; and co-ordinated reductions in U.S. financial holdings.

To some extent, versions of all these elements have already been mooted, if not actually enacted, including by Canada. What has not happened, at least publicly, is a clear collective message that this is what would happen if Mr. Trump permanently enacts high tariffs. There are (presumably) adults advising the President, and that’s why the face-saving first scenario is more likely, if not as satisfying, for the rest of the world.

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